Avoiding A General Security Agreement

Does the bank always require a GSA?

Whether you’re an individual or a company director, you’ll usually need to provide a residential property as security when applying for a commercial property loan.

You may not know that most banks will also ask for a General Security Agreement (GSA) over the property and any and all of your business assets.

You can avoid a GSA but it will depend on the strength of your application, your commercial property, and the residential property that you’re using to secure the loan.

How do I avoid a GSA?

More often than not, borrowers simply accept a General Security Agreement without bothering to ask if it’s really needed.

Some lenders are more flexible than others and will often waive the need for a GSA depending on a combination of the following.

You’re buying a standard commercial property

Offices, warehouses, factories and retail units are a lot easier to sell compared to pubs, restaurants and commercial farms.

The credit department may only argue for a GSA when it comes to purpose-built properties.

The loan is under $1 million

In this case, a Guarantee and Indemnity Agreement or G&I will be requested instead.

This is basically a “handshake” agreement between the director and the bank.

It stipulate that they will take on fully responsibility of the debt in the event of a shortfall in selling the property and assets to cover outstanding debt.

G&I agreements are common with trade finance and invoice discounting.

You’re in a strong financial position

You can show this with your last 2-3 years personal and business financials, a strong asset-to-debt ratio, and a clear credit file.

Basically, as long as you can service the debt or you have sufficient equity in a commercial property to meet the loan repayments, your broker can argue against a G&I and GSA.

You have experience and a strong business plan

Having considerable business experience can make or break a commercial loan application and it can help to determine whether you need to provide a GSA or not.

Every case is assessed on its merits!

Speak with one of our mortgage brokers about avoiding the General Security Agreement requirement.

Call 1300 889 743 or complete our free assessment form today.

Who benefits?

Complex transactions

Companies or trusts with multiple shareholders or directors who are minority shareholders can benefit.

It doesn’t make sense for the appointed director with a minority shareholding to act as guarantor for the commercial loan.

In this case, the GSA requirement will either be waived or the owner will guarantee the loan instead.

Business growth won’t be tied up

If you need a business loan down the track, you’ll be able to use equity in the commercial property as security.

If there is already a GSA over the property, then you won’t be able to get finance with another lender.

The only exception is if a carve-out (‘priority deed’) is agreed to by all parties or the bank de-registers the General Security Agreement.

Going down this path is often a long and drawn out process, not helpful when you’re trying to grow the business quickly.

Most of the time a GSA is overkill!

Banks are very risk-averse so, more often than not, they over-collateralise their loans by asking for a General Security Agreement when your residential property is actually enough.

The reason is that commercial real estate prices tend to fluctuate a lot more than residential real estate.

This is largely due to changes to the economy on a macro level (such as mining and manufacturing) but sector level changes as well.

All of this affects buyer appetite for your property.

Sometimes, it becomes difficult to find a buyer for a commercial property, or to sell it at a price that will allow a bank to cover their losses.

By taking a ‘security interest’ in your residential property and the commercial property, the bank is reducing their level of exposure.

This is crucial in the event that you default on your mortgage repayments and they’re forced to sell.

How does a GSA work?

Since 30 January 2012, fixed and floating company charges have effectively replaced General Security Agreements.

The GSA doesn’t give the bank rights to your property and assets but what it does do is provide them with a security interest via the commercial loan.

You “default” under the GSA if you:

• Are no longer able to meet your mortgage repayments;
• A third party, such as lender or a corporate entity, take security over any property already secured by the GSA. This includes opening a line of credit with a supplier.

The GSA applies to all property (other than land) and assets including water rights and some statutory licences, goods or inventory, shares, debts and even intellectual property.

If your business goes into receivership, the receiver may choose to sell the business and any of your assets to make up the bank’s losses.

What is the PPSR?

The Personal Properties Securities Act 2009 of Australia (PPSA) came into effect on 30 January 2012.

The PPSA essentially replaced all personal property securities law in Australia.

This included the register of company charges maintained by the Australian Securities and Investments Commission (ASIC) and a number of other state-based registers including Registers of Encumbered Vehicles (REVs).

The Personal Property Securities Register (PPSR) applies to companies, individuals, partnerships, trusts and other legal entities.

It’s important that you and your bank register the General Security Agreement that’s in place with the PPSR.

Get legal advice and speak to a mortgage broker

You should always get legal advice from a solicitor that specialises in commercial property purchases.

We can recommend some to you!

Commercial loans and their associated terms are highly negotiable so it’s important to speak to a specialist mortgage broker.

We’re here to help you present a strong case to the right lender.

Call us on 1300 889 743 or fill in our online enquiry form.

We’ll come back to you with an indicative funding proposal and let you know if you can avoid a General Security Agreement.